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The Market for Cryptocurrencies
The growing market for cryptocurrencies, when viewed through the lens of Nobel Laureate F A Hayek’s radical idea of abolishing governmental monopoly over currency and introducing unregulated private currencies, reveals fascinating insights. Though over four decades apart, the resemblances and the dialectics of the two radical developments are uncanny.
Since the inception of bitcoin in 2009, there has been considerable global interest in cryptocurrencies—digital currencies based on online platforms that use cryptography to allow peer-to-peer (P2P) direct transactions. Cryptocurrencies have the potential to disrupt monetary systems and provide formidable competition to established payment systems (Bhattacharya 2014). The technology behind cryptocurrencies, such as bitcoin-blockchain, obviates the need for intermediation to manage the exchange of funds and enables decentralised, secure and verifiable transactions. While there has been a remarkable growth in the transaction volume as well as market capitalisation of bitcoin, equally remarkable is the volatility of bitcoin prices.1 Over the past few years, there had been a spectacular surge in the price of bitcoins, which was followed by its dramatic crash on 21 December 2017. With the proliferation of a large number of alternatives to bitcoin, cryptocurrency exchanges and considerable volatility in the market valuation of cryptocurrencies, it is worth revisiting a 42-year-old radical proposal of F A Hayek, the Austrian economist and Nobel Laureate.
Hayek (1976) argued for abolishing the monopoly of the government over currency issue and the provision of unregulated decentralised currency. Hayek’s (1999) ideation of “good money” as a solution to the problem of inflation and business cycles entailed denationalised money, free of government monopoly and supplied by a competitive private sector. I argue that cryptocurrencies bear a stark resemblance to Hayek’s ideation of competitive currencies in a free market economy, as well as the operationalisation of such currencies. Hayek’s insights on how the scarcity of currency and the stability of the value of currencies would play a role in their widespread acceptance, shed light on the market for cryptocurrencies. Furthermore, the uncertainty in cryptocurrency prices and informational asymmetries in the unregulated market for cryptocurrencies, also put to test the validity of the Hayekian logic of price mechanism as a solution to the problem of dispersed and incomplete knowledge.
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